The data highlight of the week proved an anti-climax, leaving markets on hold ahead of today’s announcements from the ECB and next week’s FOMC statement.
Wet weather and strikes dampen UK activity
UK GDP fell .5% in July, unwinding all the previous month’s .5% increase, with declines in each of the three main sectors – services contracted .5%, production output fell .7% and construction declined .5%. Services output was hit after NHS strikes by doctors and radiographers led to the cancelation of nearly 66,000 appointments and procedures, with a 2.1% slump in output from the Human Health and Social Work subsector. Consumer-facing services were flat on the month as a surge in sports and recreation activities was offset by soft retail sales following the wettest July since 2009, while other services fell by .6%.
Over the three months to July, GDP expanded .2% compared to the prior three months to April and missed estimates for .3% growth. However, wages are now growing faster than price inflation, and the prospects for a pickup in consumer spending have improved despite the disappointing start third quarter economic growth.
Eurozone likely to suffer soft third quarter
Industrial production in the eurozone slumped 1.1% in July and was 2.2% lower year over year – a far worse result than the mild .3% contraction expected. National data from the big four economies had already signalled a soft result, but a 6.6% monthly decline in Irish industrial output and a 1.6% decline for Eurostat’s measure of German industrial production pulled the eurozone aggregate down by more than expected. According to the German Economy Ministry, a noticeable economic recovery is unlikely before the start of next year, as “Current indicators point to a weak third quarter”.
US CPI leaves door open to a final hike
US headline inflation printed a tenth above estimates at 3.7% in August, accelerating from 3.2% rate in July mainly due to a 10.6% monthly leap in the price of gasoline. Core inflation slowed to 4.3% and matched estimates, but the monthly increase in the core CPI of .28% follows two consecutive monthly increases of .16% and was the first acceleration since February. Rates traders had already been expecting the worst, and after a brief dip in treasury futures immediately following the release, the yield on the ten-year note closed at 4.25% (-3bps).
The slowdown in core measures of inflation gives the Fed cover to pause at next week’s meeting, although prices for core services less housing rose .37% on the month – the largest increase since March. Year over year, this super-core measure of annual inflation was roughly unchanged at 4% for a third consecutive month but is down from a peak of 6.5%.
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The monthly increase in the CPI shelter index of .3% was the lowest since January 2021, but that was more than offset by steeper increases for other items, including a 2.4% monthly jump in motor vehicle insurance and a surprising increase in the cost of new cars following four monthly declines. Used car prices fell 1.2% on the month but the Manheim auction price index suggests those monthly falls may be ending soon, airline fares bounced 4.9% after two consecutive monthly declines of 8.1%, and health insurance prices were down 3.6% on the month and 34% year over year.
Traders’ expectations for a final hike in November were little changed after the data with money markets pricing a roughly 39% probability, but the Fed’s task is complicated by different dynamics of the major inflation components, and it is far too soon to expect a continued decline in shelter costs to drive core inflation back below 2%.
Separately, the weekly MBA update showed a 1% increase in mortgage applications for home purchases despite a 6bps increase in the average 30-year mortgage rate to 7.27%, but applications are 27% lower than a year earlier and remain just off the lowest level since 1995.
Markets
Fixed income
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Equities
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Commodities
Singapore iron ore futures surge 4.8% to $119.42/ton – the highest in seven months.
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Today’s macro agenda
UK RICS House Price Balance August
ECB rate decision
US retail sales August, PPI August, weekly initial and continuing claims
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